The NASDAQ Pre-Market: What You Need To Know

In the Triassic period, before everyone on the planet was connected, stock exchanges had business hours just like your neighborhood dry cleaner. Get there a minute after closing, and you were out of luck until the following morning. If you wanted to buy and sell stocks on your schedule, rather than the market’s, you had to be a Vanderbilt or a Rockefeller (or a well-endowed pension fund). Ordinary folks had to wait.

But stock trades often don’t require the presence of an actual human. So, the thinking among some enterprising brokers went, what’s to stop a fully electronic and automated exchange from conducting business outside the standard Wall Street hours of 9:30 a.m. to 4 p.m.?

Officially known as extended-hours trading, NASDAQ’s pre-market evolved later than you might think. Decades after computers became commonplace, in fact. It’s hard to believe, but it wasn’t until 1999 that individual investors had access to the professionals’ networks. With the advent of the pre-market, buyers and sellers can now conduct trades in a larger timeframe, which sounds self-evident but isn’t necessarily.

The difference between pre-market trading and its standard-hours sibling is one of kind, not merely of degree. The existence of the pre-market does more than just extend the trading day by 85%, much more. It affects prices and quantities, too. There are fewer participants in the stock exchange during pre-market hours, meaning that securities become less liquid. Attempt to buy (or sell) stock at 5 a.m. Eastern Time, and you’ll find fewer potential sellers (or buyers) than you would at noon. Individual investors are outnumbered and outhustled even more starkly during pre-market than during regular business hours. If the California State Teachers’ Retirement System wants to purchase a giant block of stock before 9:30 a.m., and the Oklahoma Public Employees Retirement System has one to sell, your personal bid or ask price will be politely ignored. (For more, see: How Nasdaq Continues To Innovate.)

Institutions Reign

The institutions and other folks who set and codify the Wall Street rules know that you’re probably going to be out of your element during pre-market. That’s why your online brokerage account restricts your ability to take full advantage of the pre-market. Charles Schwab Corp. (SCHW), for instance, will let you place orders pretty much all day (and all night) long. But they won’t attempt to execute your trade until 8 a.m., 90 minutes before the markets open in earnest. Trust them: on balance they’re doing you a favor. (For more, see: Brokers and Online Trading: Accounts and Orders.)

There are other restrictions, too. For the most part, brokerage houses will allow you to make only plain old limit orders during pre-market. If you want to execute a market order (i.e., the issue sells at the going price, as opposed to no worse than a fixed price you’ve already determined), you’ll again have to wait until standard hours. The number of shares per order is usually restricted, too. Schwab won’t let you offer or bid for a lot of more than 25,000 shares. And if you do buy or sell anything pre-dawn, it’s likely they’ll indeed be shares, as opposed to bonds or pieces of a mutual fund or some other security. E*Trade Financial Corp. (ETFC) won’t let you trade anything beyond stocks in the early morning.

TD Ameritrade Holding Corp. (AMTD) is similarly restrictive, offering its pre-market services with a larger warning label than you’ll find on a pack of cigarettes. The brokerage houses remind you that quotes might be delayed. End-of-day news releases can affect prices more than you’d imagine. There’s no law that says the price at last night’s official closing must equal the price at this morning’s official opening. Furthermore, your order might not even be executed – you got out of bed early for nothing. Now, sufficiently alerted, get out there and trade if you still have the intestinal fortitude. (For more, see: How Can My Stock's Price Change After-Hours, And How Does This Affect Investors?)

The Bottom Line

On balance, the disadvantages to pre-market trading appear to outweigh any benefits, at least for the individual investor. Extended-hours activity is affected greatly by doings outside of the market itself. In other words, rather than prices being set mostly by supply and demand, external factors such as news stories and political events can have a bearing on how much stocks will sell for in the pre-market. If you understand that and are aware of the often overwhelming risks, there exists the potential to capitalize. If you misstep, the best-case scenario is that your order might not be executed. The worst is that your order will be executed at a price you could instantly end up regretting.